VALUATION HIGHLIGHTS

1. North America constitutes 38% of the Trefis price estimate for Diageo's stock.
2. Europe constitutes 23% of the Trefis price estimate for Diageo's stock.
3. Asia Pacific constitutes 21% of the Trefis price estimate for Diageo's stock.

WHAT HAS CHANGED?

1. DEO Stock vs. S&P 500 Performance
   • The changes in DEO stock over the recent years have been far from consistent. Returns for the stock were 42% in 2021, -17% in 2022, -16% in 2023, and -10% in 2024.
   • In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 - indicating that DEO underperformed the S&P in 2023 and 2024.

2. Latest Earnings (FY24)
   • In FY24, Diageo reported net sales of $20.3 billion, marking a y-o-y decline of 1.4%. Organic volume was down 3.5%, while price/mix contributed 2.9% to the organic revenue decline of 0.6%. Reported EPS decreased 12% y-o-y to $6.91.

3. Interest Builds Up In The Premium Tequila Market
   • Tequila is undergoing a transformation in consumer perception, moving beyond its traditional role in cocktails to become a spirit increasingly enjoyed neat or sipped. This shift in consumption habits is reflected in the significant growth of tequila sales, particularly within the super-premium segment. In North America, the sales of tequila have consistently outpaced the overall alcoholic beverage market, with premium brands playing a key role in elevating the spirit's image.
   • The growing consumer interest in tequila is also evident in the continued mergers and acquisitions (M&A) activity within the industry. While the text mentions earlier significant deals such as Bacardi's acquisition of Patron Spirits for $5.1 billion, Pernod Ricard's purchase of Avion Tequila, and Diageo's acquisition of Casamigos tequila, the trend of investment and consolidation in the tequila sector has continued. For example, in more recent years, there have been further acquisitions and strategic investments as major players look to capitalize on the sustained popularity and premiumization trend in tequila.
   • Diageo has also had considerable success following the purchase of another super-premium brand, Don Julio. In FY 2024, the brand reported a net sales improvement of 12%, continuing its double-digit growth run. Tequila remains a high-growth product for Diageo, and its contribution to overall sales is expected to rise over the coming years.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Diageo that present opportunities for upside or downside to the current Trefis price estimate:

North America Revenue per Unit

The growth in sales of Scotch and North American whiskey has positively impacted North American revenue per unit. Furthermore, the increasing trend of premiumization has contributed to the improvement of this metric, which saw an average annual growth rate of 7% between 2020 and 2024. Trefis anticipates steady growth in revenue per unit throughout its forecast period, primarily driven by higher sales of premium products.

Asia Pacific Volumes

India is a pivotal growth market for Diageo, evidenced by the company's acquisition of a majority stake in United Spirits Ltd, and currently stands as the second-largest revenue contributor. Furthermore, strong performance in China, notably within the Chinese White Spirits category, has significantly boosted Diageo's revenue growth. These two markets are projected to be key drivers of Diageo's future success. Having reached 81 million units in FY 2024, this metric is expected to exceed 100 million units in the years ahead.

BUSINESS SUMMARY

Diageo is a multinational alcoholic beverage company and the world's leading premium drinks business. The company is headquartered in London, England, and is listed on the London Stock Exchange (LSE: DGE), as well as on the New York Stock Exchange (NYSE: DEO). The company is the world's largest producer of spirits and a major producer of beer and wine. Its brand portfolio includes globally recognized names such as Smirnoff, Johnnie Walker, Baileys, and Guinness. Diageo is also the world's largest whiskey producer, with 38 distilleries across Scotland, Canada, and the U.S.

Diageo was formed in December 1997 through the merger of Grand Metropolitan Public Limited Company (GrandMet) and Guinness PLC (Guinness Group). Historically, Diageo divested itself of non-core businesses, including the sale of Pillsbury to General Mills in 2000 and Burger King to Texas Pacific in 2002. In 2011, Diageo expanded its presence in the Turkish market by acquiring Mey Icki for $2.1 billion. A year later, in 2012, it acquired Ypioca, Brazil's largest-selling brand of premium cachaca, for $300 million. Also in 2012, Diageo acquired a 53.4% stake in the Indian company United Spirits for $1.28 billion. The company also holds a 34% stake in the Moet Hennessy drinks division of the French company LVMH. Annually, Diageo produces its brands from 143 sites, selling in 180 countries.

In recent years, Diageo has continued to strategically adjust its portfolio. In 2023, Diageo acquired Windsor Global, a brand of whisky and brandy, to strengthen its international premium spirits business. In early 2025, Diageo sold its 54.4% shareholding in Seychelles Breweries Limited to Phoenix Beverages Ltd and its 80.4% shareholding in Guinness Ghana Breweries plc to Castel Group, focusing on efficient operating models in Africa.

SOURCES OF VALUE

Diageo, as the world's largest spirit producer by volume, derives significant value from its North America segment, encompassing U.S. Spirits & Wines, Diageo-Guinness U.S.A. (DGUSA), and Canada. In FY24, North America contributed 40% to the company's net sales and profits. Diageo's increasing share in the global volume of premium spirits is partly attributable to its majority 55.92% stake in United Spirits.

Strong brand marketing and increasing popularity of ultra-premium and premium brands to boost Diageo's volumes

Diageo maintains a strong premium brand positioning worldwide, with the U.S. being its largest market. Increased advertising, growing brand popularity, and higher consumer spending are expected to drive a shift towards more expensive alcohol brands, thereby increasing Diageo's sales volumes and revenue per unit.

1. North America accounts for roughly 22% of Diageo's total volume. The company enjoys a strong brand position in this region, primarily due to its leading performance in the vodka and whiskey categories, complemented by a growing share in the rum market. However, FY 2024 (ending June 2024) saw a 4% decrease in volume in North America, largely attributed to the impact of high inflation on consumer spending. To address this and drive future growth, Diageo is focusing on engaging millennial and multicultural consumers through a mix of traditional and digital marketing. While all key brands gained value share during this period, vodka remained a challenge. Diageo is implementing specific strategies to revitalize its vodka brands, including highlighting core Smirnoff flavors like Apple, Peach, and French Vanilla, and emphasizing Ketel One's 100% non-GMO status. A key focus for driving U.S. spirits performance is the super-premium vodka segment.


2. Diageo holds the leading position in the spirits market in both the U.K. and Greece. In Ireland, Diageo is the second-largest spirits brand, capturing nearly one-third of the market share, placing it closely behind Ireland distillers. Within the Irish market, Smirnoff Red and Captain Morgan are Diageo's best-performing brands.


3. Diageo's Smirnoff vodka brand is one of the top vodka brands in Eastern Europe. Premium scotch and rum brands are also gaining huge popularity in these regions.


4. In India, Diageo has fully integrated United Spirits Limited, the largest spirits company, solidifying its leadership in the Indian spirits market. Similarly, in Australia, Diageo holds the leading position in the spirits market. Vietnam's spirits market is led by Hanoi Liquor Joint Stock Company, in which Diageo holds a 56% ownership stake.



KEY TRENDS

India's Growth Potential

India remains a significant growth opportunity and a key strategic focus for Diageo in the medium term. The company has demonstrated strong progress in accelerating growth by concentrating on long-term prospects while effectively managing short-term challenges arising from events and regulations. Recent net sales growth in India has been driven by increases in both sales volume and pricing. Diageo's strategy in the country centers on expanding its 'Prestige and above' brands, which now constitute a substantial portion (over two-thirds) of its portfolio in the Indian market. This focus on premiumization, combined with improved productivity, has led to enhanced gross margins in India. To further improve cost efficiency, Diageo has implemented initiatives such as 'tram-lining,' a detailed cost analysis comparing product costs against market competitors and internal benchmarks. This approach has contributed to reductions in glass costs through light-weighting and a more effective sourcing strategy. Additionally, the adoption of Zero-based budgeting has helped to lower indirect costs.


Continued Growth in China

Following a period of challenges due to an anti-extravagance campaign, Diageo has successfully strengthened its business in China through improvements in its route-to-market strategies and its sales and distribution system. While the exceptionally high growth rates of the past may not be sustainable, Diageo anticipates continued robust double-digit growth in China, primarily fueled by the demand for its whiskey portfolio and its Chinese White Spirits brand, Shui Jing Fang, in particular.


Expanding Middle Class in Africa

Africa's burgeoning middle class, with its increasing disposable income and appetite for quality products, continues to make the continent a highly attractive market for the wine and spirits industry. According to IWSR, a British wine consultancy, the market in 24 sub-Saharan African countries has been expanding at a rate significantly higher than the global average. The saturation of beer markets in North America and Europe has also prompted breweries to invest in the promising, albeit sometimes challenging, markets across Africa. Sub-Saharan African countries are also experiencing rapid urbanization, with the U.N. projecting the urbanization rate to reach 45.9% by 2030. This increasing urbanization, coupled with rising disposable incomes, presents a significant advantage for liquor companies as consumers transition to higher-quality beverages. Furthermore, while the current average beer consumption in Africa is around nine liters per person annually, significantly lower than the global average of 45 liters, this rate is poised for substantial growth as disposable incomes rise.